Why Osborne's new lending scheme won't work

If consumers are determined to hoard cash, who will borrow?

The likelihood is that George Osborne's new bank lending scheme, announced last night in his Mansion House speech, will neither revive the economy nor the Tories' moribund poll ratings (they currently trail Labour by 12 points).

Osborne has always said that he and David Cameron are "fiscal conservatives but monetary activists" and more monetary activism is what we're getting. Under a new "funding for lending" scheme, worth up to £80bn, the Bank of England will provide cheap loans to banks for several years, at below market rates, in exchange for them lending the money to households and small and medium-sized businesses. In addition, the snappily-titled Extended Collateral Term Repo Facility will lend banks a minimum of £5bn a month in the form of six month loans to them. The aim of both schemes is to stimulate the economy by increasing loans to credit-starved businesses and households. But will they work? Almost certainly not.

There is increasing evidence that the UK is caught in a liquidity trap, a situation in which confidence is so low that looser monetary policy (e.g. increasing the money supply or lowering interest rates) has no positive effect on the economy. If consumers and businesses are determined to hoard cash (as is common in a recession), then the new loans will not be taken up. As for those willing to borrow, many are so indebted that the banks won't lend to them anyway. Put simply, the creditworthy won't take loans and the uncreditworthy won't get them.

It is in such circumstances that the government must act as a spender of last resort and engage in fiscal stimulus (higher spending and lower taxes), as Ed Balls has repeatedly argued. Since Osborne is so fond of boasting of the UK's historically low bond yields (although they owe more to the Bank of England's quantitative easing programme than to his deficit reduction programme), the least he could do is take advantage of them. He should increase borrowing to fund higher infrastructure spending (the most effective stimulus, according to the Office for Budget Responsibility) and tax cuts.

As for the politics, they're not great for Osborne either. As Tory MP Douglas Carswell, an increasingly vociferous critic of the Chancellor, noted on Twitter: "Print-money-and-give-to-banks (govt) V Print-money-and-give-ppl (Balls). Guess which will play better in studio debates?"

In a recent essay in the New York Review of Books, Paul Krugman sagely observed that "the economic strategy that works best politically isn’t the strategy that finds approval with focus groups, let alone with the editorial page of The Washington Post; it’s the strategy that actually delivers results." If Osborne wants to restore his political reputation (he is both Chancellor and the Tories' chief election strategist) and give the Tories a faint hope of forming another government, he should adopt a plan that works. But first he must learn the lesson of the 1930s - you can't cut your way out of a recession, but you can spend your way out of one. And in these depressed times, only big government has the firepower to do so. 

Chancellor George Osborne delivered his annual Mansion House address last night. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.